Wharton MBA 2013: The class the loans fell on

August 22, 2011, 6:34 PM UTC

The Wharton School of the University of Pennsylvania

) — Dubbed “The Class The Dollars Fell On” by Fortune, the 1949 graduates of the Harvard Business School were undoubtedly the most celebrated group of MBAs in history. Though the 700 or so members of the class graduated with modest expectations, more than a third would become CEOs and well over half would end up as multi-millionaires.

Fast forward to this year’s incoming class at the University of Pennsylvania’s Wharton School. The 845 students who start their first classes on Sept. 7 are among their generation’s best and brightest. Unlike the men of 1949 — there were no women — the Wharton group is as diverse as any in history: A record 45% are women and 36% hail from outside the U.S. To come to the Philadelphia campus, they left some of the most prestigious organizations in the world, where they already were on the fast track to success.

But there’s one other very big difference between this year’s incoming Wharton class and the most renowned: debt and lots of it. Largely funded by the GI Bill, few members of Harvard’s class graduated with any debt. If the class of 1949 had been the most wildly successful of all the MBA classes ever, it can be said with certainty that Wharton’s class of 2013 will be the most heavily in hock.

Call them the “Class The Loans Fell On.”

A record $112.4 million in debt

In all likelihood, this will be the first MBA class in history to pay more than $100 million in loans and interest payments for the privilege of gaining the degree. In fact, if the class of 2013 continues to borrow at rates similar to their predecessors, it will take on a staggering $112.4 million in debt, loan origination fees, and interest payments. That heart-stopping sum includes interest payments of about $33.5 million. All this, for just a single class of MBAs, one in four of which is likely to incur no debt at all.

Brought down to individual terms, a typical Wharton MBA in this class will graduate with average debt of nearly $124,000. With monthly payments of $1,477 over 10 years, the total would come to $177,256, including nearly $53,000 in interest alone. It would be the proverbial bite that would be hard to chew for most because a graduate would need an annual gross salary of $176,560 to comfortably pay down the loan, according to financial advisors. That’s not a comforting thought when the median starting pay of a Wharton grad was only $110,000 last year. (You can crunch your own numbers on an online loan calculator to estimate the impact of your own debt.) And none of these numbers include the debt assumed by students during their undergraduate years.

‘Can students pay tuition on American Express?’

It seems oddly appropriate that for several weeks this summer the post that rose to the top of the class’s e-Talk forum was on whether you should use a credit card to pay the fall semester tuition bill due by the end of July (students had to pay a 1.5% fee if they didn’t meet the deadline). An incoming MBA candidate asked, “Can students pay tuition on credit cards, in particular American Express?” (The answer, by the way, is yes. Wharton’s parent university allows online tuition payments with an Amex (AXP) card but adds a 2% “convenience fee”).

Truth is, Wharton students show little concern about the costs of the degree. They rightly believe the school’s brand is among the best in the world and will pay off in the long run. The investment is something of a “calculated risk.”

As one incoming student puts it, “The tuition is a big number when you look at it. But I think an MBA or an education in general is a long-term investment. When you graduate from a program, you might get a salary, which is not all that great. But that’s a short-term phenomenon. At the end of the day, you take a calculated risk. There’s a lot more that I’ll gain from the program, and if I have to repay the loan over a longer time, that’s okay.”

Other students take a similar view, even if they’re inclined to worry a touch more. Consider Monica Tai. She will begin her MBA studies at Wharton next month. After graduating with a B.A. in economics from Cornell University in 2006, she worked as an “actuarial analyst” for Mercer Consulting for nearly four years. Clearly, Tai knows and understands the compounding effect of numbers. She was able to secure what she calls a “good financial aid package” from Wharton, but still has to borrow an unspecified amount of money to pay for the degree. She also has “less than $10,000” of undergraduate debt left.

Is she concerned? “I’m a little bit worried,” she says. “I think there will be enough incremental value to pay back what I’ve lost by not working for two years. But I don’t know if it’s enough to pay back what the loans cost. I guess it really does make me think that I have to recruit in particular types of jobs so that I can pay back the loans.”

The one ranking Wharton would rather not top

Wharton is passing the $100 million threshold before any other business school because of the large size of its classes as well as the size of its average MBA debt, which is the highest in the world. Wharton MBAs rack up a third more debt than those at Harvard Business School. For the class of 2010, Harvard MBAs walked off campus with average debt of $73,100 versus Wharton’s $109,836.

The total debt tab for Harvard’s class of 2013? It’s more than $40 million less than Wharton — an estimated $71.7 million in debt, loan origination fees and interest.

With a $2.3 billion endowment that is three times the size of Wharton’s, Harvard Business School has a distinct advantage in this game. It has been among the most generous B-schools when it comes to offering fellowship grants to keep student borrowing in check.

Over several months, Wharton has repeatedly declined requests to speak about its students’ appetite for debt. On Friday, a Wharton spokesman declined yet again. “We still have no plans to participate in this story,” said Ira Rubien of Wharton.

Christian Schraga, for one, thinks the numbers for the class are nothing less than “frightening.” Schraga graduated from Wharton in 2002 and believes that this level of debt has major consequences on a person’s life. “I’m not sure that these people understand what they’re getting into,” he says. “They’ve limited their options for what they want to do because of the debt. It requires a level of indebted servitude to pay back the debt, versus going after what your heart desires.”

That means that anyone who’s thinking about taking on the uncertain job prospects and the very certain loan payments should have a clear idea of the job they hope to get, their chances of getting it, and what it’s likely to play. With today’s steep tuition bills, studying hard and hoping for the best is a risky strategy at best.

Schraga should know. He enrolled in Wharton’s MBA program in 2000 with a glamorous image of life after B-school. “I would be living in a Trump luxury apartment with crystal whisky decanters on some sort of bar cart,” he quips. He didn’t worry much about borrowing $112,875 for the privilege. Schraga, however, did not have a very clear picture of how to achieve that dream beyond having a sense that he wanted to work in the entertainment industry.

Then the market crashed, and a sense of desperation set in around campus. Without a job, he and his classmates began to fear the unthinkable: bearing unshakable debt — U.S. bankruptcy law rarely forgives student loans. Like most of his classmates, he scrambled for the jobs that came up on campus, rather than focusing on ones he really wanted.

‘If I have to do this job, I’ll die’

During a McKinsey interview for a consulting role in New Jersey, Schraga felt miserable: “I thought, ‘if I have to do this job, I’ll die.’” McKinsey offered him the job, which included a salary that would have comfortably covered his loans, but a September start date gave him time to look harder for that coveted entertainment gig.

Unfortunately, an MBA doesn’t hold much weight in entertainment. He landed a “foot in the door” job for ColumbiaHouse.com. “Starting in the mailroom” may be a time honored tradition in Hollywood, but it’s a much more difficult proposition when you’re carrying tens of thousands of dollars in student debt. Schraga’s job paid half of what he needed to make his $1,500 loan payments every month. So he moved into an apartment with four other people and went on a strict budget.

Three years later, from the same shared apartment, he published a warning on the Internet to MBA hopefuls. “Business school,” wrote Schraga, “is a big risk. Should you choose to enroll, the only certainty is that you will shell out about $125,000. Such a figure correlates to… a ten-year period of time in which you will not be able to save a red cent.”

Much of the debt is eagerly taken on because students don’t think through the full costs of borrowing, says Mark Kantrowitz, publisher of FinAid, a website that helps college students with financial aid. “They don’t really think about it,” says Kantrowitz. “If you have a dream, you sign whatever piece of paper is put in front of you to enable the dream. You think you’ll figure out how to pay it back later on.”

MBA degree: Not so rare and much more expensive

For the Harvard Class of 1949, of course, the rich life was easy. They ascended the ranks of business in the Go-Go years as the U.S. bestrode the world as an economic colossus. When they graduated, there were only 2,300 other students getting MBAs that year — and only 50,000 living MBAs in the entire U.S. Today, roughly 250,000 people in the U.S. alone are enrolled in MBA programs, which pump out more than 100,000 MBAs a year. There are some 40,000 living Wharton MBAs alone.

Bottom line: The degree isn’t as rare as it was, it costs a lot more to get, and the rewards for having it have fallen as well — even at Wharton.

Just take a look at what has happened in the last decade alone. In 2001, Wharton recommended that applicants budget $59,728 a year to attend, or about $120,000 in total for the two-year MBA program. Graduates from Wharton in 2001 reported median base salaries of $95,000 a year.

Ten years later, the median starting MBA salary at Wharton was just 15.8% higher, at $110,000 for the class of 2010. But the recommended budget was up 40.6% to $84,000 a year, or some $168,000 for the two years. Translation: In the past decade alone, the costs of getting a Wharton MBA has risen nearly three times as much as the initial financial rewards of having the degree in the past decade.

For the class of 2013, however, these calculations are likely to get scarier. Wharton is now recommending an annual student budget of $89,200 — a sum that does not include the school’s global immersion program, which typically costs between $4,000 and $5,000 more. That brings a student budget up to $94,200 for the first year alone, or $183,400 for the two-year program.

Unless starting salaries rise dramatically, or Wharton finds more cash to help its students, the continuing increase in tuition will mean that an MBA from Wharton MBA will become an even more uncertain investment.

Roughly 30% of the University of Pennsylvania’s graduates are having trouble paying back their student loans, according to government statistics. (Wharton does not report this data separately to the Department of Education as some other business schools do). Missing payments and extending a loan can substantially increase the costs of debt. But most students are less concerned about potential defaults than they are about how this much debt constrains their freedom to pursue their passion.

“The Class The Dollars Fell On” had no such concerns. They graduated — with virtually no debt — into an era of unparalleled prosperity. That’s far from today’s frighteningly volatile economy, where most worry whether the U.S. is about to enter into a “double-dip recession” that will make it even more difficult for “The Class The Loans Fell On” to land the jobs that will help them pay off their huge debts.

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